HSBC’s largest shareholder Ping An has reinforced its campaign to break the bank up, rejecting executives’ recent arguments that a split would take too long, cost too much and damage earnings from its global network.
Chinese insurer Ping An, which owns 8.4 per cent of the stock, claims that a spin-off of its Asian business would create between $25bn and $35bn of additional market value by releasing its lucrative Hong Kong operations from the drag of the rest of the world, where HSBC is far less profitable, according to a person familiar with its thinking.
Analysts at Ping An believe that a break up could release the lender from $8bn in additional capital requirements imposed on so-called global systemically important banks (G-SIBs), the person said.
The insurer is also dismissive of HSBC’s assertion that an expensive new IT system would have to be built over a five-year period and that billions in cross-border investment banking revenues would be lost as clients desert the lender, wary of dealing with a China-headquartered entity.
“HSBC only emphasised and clearly exaggerated the downsides and challenges of spinning off its Asia business, but did not mention the huge benefits and long-term value that a spin-off could create,” the person added.
HSBC did not immediately respond to a request for comment.
In February, Ping An, led by Chinese tycoon Peter Ma, started agitating for a break-up, frustrated by years of underperformance and the cancellation of its dividend during the coronavirus pandemic. It has argued that HSBC’s position straddling east and west is unsustainable as US-China geopolitical and trade tensions escalate.
Executives had hoped that better than expected second-quarter earnings would relieve the pressure and pacify its largest shareholder. Pre-tax profit beat analysts’ estimates and executives predicted a $6bn earnings windfall over the next 18 months as global interest rates continue to rise.
A day later, chair Mark Tucker met retail shareholders — which own about a third of the stock and who were also incensed by the Covid-era dividend cancellation — to set out 14 reasons why he believes that “the best structure is our existing structure”. He argued that a break-up would be a “hugely complex exercise” that would “negatively impact the ability of Hong Kong to remain a vibrant dynamic international financial centre”.
However, Ping An told management that almost all of its recent revenue growth was dependent on a “phased, shortlived and uncontrollable interest rate hike cycle” and that its “underperformance has not yet been fundamentally addressed and it is in urgent need of radical change”, a person familiar with the engagement said.
“HSBC’s Asian business continues to deteriorate and its revenues and profits have been declining for the past two years,” the person close to Ping An said, pointing to its lower valuation and higher cost:income ratio than its majority-owned Hong Kong retail banking subsidiary, Hang Seng, and emerging market-focused rivals such as DBS in Singapore.
However, the most serious problem flagged by HSBC would be the potential loss of its US dollar clearing licence if it moved its Asian headquarters to Hong Kong. HSBC has been the sole settlement institution for dollar clearing in the city since 2000 and is one of the top five clearers of cross-border transactions globally.
This month, the bank said a split could mean the “potential loss of direct access to US dollar clearing and difficulty in securing a new licence”. Ping An has not addressed this danger in its arguments for a break-up.
Fears in the UK and US of Chinese Communist party influence on operations have also been growing. The Financial Times reported in July that HSBC is the first foreign lender to install a CCP committee in its investment banking subsidiary in the country, a move that underlines the tension facing the bank as it tries to navigate between Beijing and the west.